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Celestica CEO sees semiconductor industry as priority for profitable growth

TORONTO - Celestica Inc. (TSX:CLS) is making progress on adjusting its worldwide manufacturing capabilities to satisfy a more diversified base of customers in the semiconductor, solar-energy and aerospace-defence industries as it shifts away from lower-margin consumer oriented products, CEO Craig Muhlhauser said Wednesday.

The Toronto-based company lost a major source of revenue as a result of downsizing at BlackBerry (TSX:BB) — perhaps its best-known customer — but has responded by focusing on advanced electronics products for computer information storage, communications networks, solar power generation and military applications.

"We will continue our disciplined approach to the deployment of capital and only make investments that are aligned with our strategy and complement or enhance our ability to grow profitably and increase the diversification of our revenue and customer mix," Muhlhauser told shareholders Wednesday at their annual meeting in Toronto.

He said the semiconductor equipment industry, which requires complex mechanical assemblies and precision machining to meet the challenging needs of the industry's top players, is a top priority in Celestica's diversification strategy.

"We are very encouraged by the new business wins with current and new customers and believe this capability and this market offers significant opportunities for future growth and profitability," he said.

The expense and time required to ramp up for these contracts resulted in lower profitability in the semiconductor business in 2013, but Muhlhauser said "we believe that revenue growth, combined with our operational improvements, will lead to improved profitability in our semiconductor business in 2014 and beyond."

Earlier Wednesday, he told analysts in a conference to discuss the company's quarterly results that Celestica expects to build momentum as the year progresses — based on the current information from its customers, which usually provides a three-month window on future demand.

Celestica reported US$47.1 million of adjusted net earnings in the first quarter, or US$37.3 million under standard accounting — both up substantially from the same time last year — but experienced unexpected soft demand late in the quarter from some customers in its communications equipment segment.

Communications equipment — mainly used for network and corporate network infrastructure — still accounted for 40 per cent of Celestica's overall revenue in the quarter, about the same percentage as in the first quarter of 2013 but less than in the rest of last year.

In contrast, the "diversified" segment's share of revenue — which includes semiconductor and solar customers — has increased each quarter over the same period and accounted for 28 per cent of the total in the first quarter of 2014, up from 24 per cent a year earlier and 27 per cent in the fourth quarter of 2013.

Muhlhauser said revenue from Celestica's diversified business segment was negatively affected during the first quarter by the delay of one program for a solar customer into the second quarter but came in generally as expected otherwise — with strong growth from semiconductor, industrial and aerospace-defence customers.

"For the second quarter, we expect diversified to grow sequentially in the low double-digit percentages, driven by solar and aerospace-defence," Muhlhauser said.

"Revenue from our semiconductor business is expected to be relatively flat in the second quarter compared with the first quarter. However, we are expecting a stronger second half (of 2014) as end-market demand improves and as we ramp new programs."

Celestica's adjusted earnings for the first three months of 2014 amounted to 26 cents per share — above the high end of Celestica's guidance and up from 16 cents per share in the first quarter of 2013.

The company said its adjusted earnings were assisted by a one-time tax benefit worth six cents per share — resulting from a government incentive in Malaysia, where Celestica has a plant — and would have been 20 cents per share without that item— in line with analyst estimates.

Celestica's revenue fell short of analyst expectations but were at the low end of the company's guidance, dropping four per cent to US$1.312 billion in the three months ended March 31 from US$1.372 billion a year earlier.

The company's guidance in January called for between US$1.30 billion and US$1.40 billion of revenue and adjusted earnings per share of between 17 and 23 cents US of adjusted earnings. Analysts had estimated nearly US$1.36 billion of revenue for the first quarter and 20 cents US per share of adjusted earnings, according to Thomson Reuters data.

Celestica's guidance for the second quarter of this year calls for revenue to grow to between US$1.375 billion and $1.475 billion and for adjusted net earnings to be in a range of 20 cents to 26 cents US per share.

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The Canadian Press

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